38a-1 Supporting Statement (PKE)

OMB CONTROL NUMBER: 3235-0586

SUPPORTING STATEMENT
For the Paperwork Reduction Act Information Collection Submission for
Rule 38a-1
A.

JUSTIFICATION
1.

Necessity for the Information Collection

Rule 38a-1 under the Investment Company Act of 1940 (“Investment Company Act”) 1 is
intended to protect investors by fostering better fund compliance with securities laws. 2 The rule
requires every registered investment company and business development company (“fund”) to:
(i) adopt and implement written policies and procedures reasonably designed to prevent
violations of the federal securities laws by the fund, including procedures for oversight of
compliance by each investment adviser, principal underwriter, administrator, and transfer agent
of the fund; (ii) obtain the fund board of directors’ approval of those policies and procedures and
the policies and procedures of each investment adviser, principal underwriter, administrator, and
transfer agent of the fund; (iii) annually review the adequacy of those policies and procedures
and the policies and procedures of each investment adviser, principal underwriter, administrator,
and transfer agent of the fund, and the effectiveness of their implementation; (iv) designate a
chief compliance officer to administer the fund’s policies and procedures and prepare an annual
report to the board that addresses certain specified items relating to the policies and procedures;
and (v) maintain for five years the compliance policies and procedures and the chief compliance
officer’s annual report to the board.

1

15 U.S.C. 80a-1 et seq.

2

17 CFR 270.38a-1.

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2.

Purpose and Use of the Information Collection

The purpose of the information collection requirements in rule 38a-1 is to ensure that
funds maintain comprehensive, written internal compliance programs that promote compliance
with the federal securities laws. The information collections also assist the Commission’s
examination staff in assessing the adequacy of funds’ compliance programs.
3.

Consideration Given to Information Technology

Rule 38a-1 does not require the reporting of any information or the filing of any
documents with the Commission. Rule 38a-1 does require funds to maintain written policies and
procedures. Each fund also is required to maintain for at least five years a copy of the annual
compliance report provided to the fund’s board of directors. The Electronic Signatures in Global
and National Commerce Act 3 and the conforming amendments to rules under the Investment
Company Act permit funds to maintain records electronically.
4.

Duplication

Rule 38a-1 imposes a broad requirement that funds have in place written compliance
policies and procedures. Funds also are subject to certain requirements elsewhere in the federal
securities laws that require them to maintain written policies and procedures. The staff believes,
however, that any duplication of recordkeeping requirements is limited. Moreover, rule 38a-1
does not require funds to maintain duplicate copies of records covered by these more targeted
requirements, and a firm’s compliance policies and procedures are not required to be maintained
in a single location. The staff believes, therefore, that any duplication of regulatory requirements
does not impose significant additional costs on funds. The Commission periodically evaluates

3

P.L. 106-229, 114 Stat. 464 (June 30, 2000).

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rule-based recordkeeping requirements for duplication and reevaluates them whenever it
proposes a rule or a change in a rule.
5.

Effect on Small Entities

Funds, regardless of their size, are subject to the requirements of rule 38a-1. Effective
internal compliance programs are essential for firms of all sizes. Rule 38a-1 affords funds the
flexibility to tailor their compliance program to the nature of their business. Small firms, which
generally have less complex and more limited operations, likely need less extensive compliance
programs than their larger counterparts. Thus, rule 38a-1 does not inappropriately burden small
entities. The Commission believes that it could not adjust the rule to lessen the burden on small
entities of complying with the rule without jeopardizing the interests of investors in small funds.
The Commission reviews all rules periodically, as required by the Regulatory Flexibility Act, to
identify methods to minimize recordkeeping or reporting requirements affecting small
businesses.
6.

Consequences of Not Conducting Collection

Less frequent information collection would be incompatible with the objectives of rule
38a-1. The annual reviews required under rule 38a-1 are integral to detecting and correcting any
gaps in the program before irrevocable or widespread harm is inflicted upon investors, and
extending the time between reviews increases the likelihood that such harm could go unchecked.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

Rule 38a-1 requires funds and advisers to maintain their internal compliance policies and
procedures and documents related to the annual review of those policies and procedures for at
least five years. Although this period exceeds the three-year guideline for most kinds of records
under 5 CFR 1320.5(d)(2)(iv), the staff believes that this is warranted because the rule

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contributes to the effectiveness of the Commission’s examination and inspection program.
Because the period between examinations may be as long as five years, it is important that the
Commission have access to records that cover the entire period between examinations.
8.

Consultation Outside the Agency

The Commission and the staff of the Division of Investment Management participate in
an ongoing dialogue with representatives of the investment company industry through public
conferences, meetings, and informal exchanges. These forums provide the Commission and the
staff with a means of ascertaining and acting upon paperwork burdens confronting the industry.
The Commission requested public comment on the collection of information requirements in rule
38a-1 before it submitted this request for revision and approval to the Office of Management and
Budget. The Commission received no comments in response to its request. Further, no person
has submitted a petition for rulemaking regarding rule 38a-1 to the Commission.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Confidentiality

If information collected pursuant to rule 38a-1 is reviewed by the Commission’s
examination staff, it will be accorded the same level of confidentiality accorded to other
responses provided to the Commission in the context of its examination and oversight program.
11.

Sensitive Questions

No information of a sensitive nature is required under this collection of information. The
information collection does not collect personally identifiable information (PII). The agency has
determined that a system of records notice (SORN) and privacy impact assessment (PIA) are not
required in connection with the collection of information.

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12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for purposes
of the Paperwork Reduction Act of 1995 and are not derived from a comprehensive or even
representative survey or study of the costs of Commission rules. Compliance with rule 38a-1 is
mandatory for funds.
While rule 38a-1 requires each fund to maintain written policies and procedures, most
funds are located within a fund complex. The experience of the Commission’s examination and
oversight staff suggests that each fund in a complex is able to draw extensively from the fund
complex’s “master” compliance program to assemble appropriate compliance policies and
procedures. Many fund complexes already have written policies and procedures documenting
their compliance programs. Further, a fund needing to develop or revise policies and procedures
on one or more topics in order to achieve a comprehensive compliance program can draw on a
number of outlines and model programs available from a variety of industry representatives,
commentators, and organizations.

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Table 1 below summarizes our current PRA estimates.
TABLE 1: RULE 38A-1 PRA ESTIMATES
REVISED ESTIMATES FOR NEWLY-- REGISTERED FUNDS
Internal Hour
Burdens

Wage Rate

Internal Annual
Time Costs

Adopt and document policies and
procedures
$4,465 4
4 hours

$1,803,860 5

79 hours

$535
(Chief Compliance Officer)

$4,268,765 6

22 hours

$71
(Compliance Clerk)

$$157,762 7

Total annual burden per response

105

Number of annual responses

× 101 8

Revised total estimated annual burden

(Board of Directors as a
whole)

$6,230,387

10,605

TOTAL ESTIMATED BURDENS FOR NEWLY- REGISTERED FUNDS
Current total estimated annual burden
Revised total estimated annual burden

$5,721,739

10,185

6,230,387

10,605

REVISED ESTIMATED BURDENS FOR ANNUAL REVIEW
Annual Review and documentation of
policies and procedures

4

The estimate for the cost of board time as a whole is derived from estimates made by the staff
regarding typical board size and compensation, based on information received from fund
representatives and publicly-available sources. The rates for all the other occupations in this
statement are derived from the SIFMA Report on Management & Professional Earnings in the
Securities Industry 2013, modified to account for an 1800-hour work-year and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead, and adjusted for inflation.

5

This estimate is based on the following calculation: 101 newly-registered funds x 4 hours by
board of directors for adoption of policies and procedures x $4,465 per hour = $1,803,860.

6

This estimate is based on the following calculation: 101 newly-registered funds x 79 hours by
chief compliance officer for adoption and documentation of policies and procedures x $535 per
hour = $4,268,765.

7

This estimate is based on the following calculation: 101 newly-registered funds x 22 hours by
clerical staff for adoption and documentation of policies and procedures x $71 per hour =
$157,762.

8

These numbers are based on Commission filings and are current as of March 20, 2020.

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32 hours

$535
(Chief Compliance Officer.)

$70,072,160 9

17 hours

$71
(Compliance Clerk)

$4,940,251 10

49

Total annual burden per response
Number of annual responses
Revised total estimated annual burden

× 4,093

11
$75,012,411

200,557
TOTAL ESTIMATED BURDENS FOR ANNUAL REVIEW

Current total estimated annual burden
Revised total estimated annual burden

202,517 hours

$70,756,960

200,557 hours

$75,012,411

REVISED ESTIMATED BURDENS FOR RECORD MAINTENANCE

Record maintenance

Total annual burden per response

2 hours

$535
(chief compliance office)

$4,379,510 12

4 hours

$71
(compliance clerk)

$1,162,412

6 hours

Number of annual responses

× 4,093

Revised total estimated annual burden

24,558 hours

$5,541,922

TOTAL ESTIMATED BURDENS FOR RECORD MAINTENANCE
Current total estimated annual burden
Revised total estimated annual burden

24,798 hours

$5,199,314

24,558 hours

$5,541,922

TOTAL ESTIMATED AGGREGATE BURDENS
Current total estimated aggregate annual burden
Revised total estimated aggregate annual burden

13.

237,500 hours

$81,678,013

235,720 hours

$86,784,720

Cost to Respondents

The staff estimates that rule 38a-1 does not impose any material cost burdens on funds,
apart from the cost of the burden hours discussed above. Although rule 38a-1 requires funds to

9

This estimate is based on the following calculation: 4,093 funds x 32 hours by chief compliance
officer for review and documentation of policies and procedures x $535 per hour = $70,072,160.

10

This estimate is based on the following calculation: 4,093 funds x 17 hours by clerical staff for
review and documentation of policies and procedures x $71 per hour = $4,940,251.

11

These numbers are based on Commission filings and are current as of March 20, 2020 for the
number of registered investment companies and as of June 2019 for the number of business
development companies.

12

This estimate is based on the following calculation: 4,093 funds x 2 hours by chief compliance
officer for maintaining records x $535 per hour = 4,379,510.

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maintain certain records for five years, these records may be maintained electronically and, even
if maintained in hard copy, are unlikely to be voluminous. The staff has not estimated a capital
cost in connection with the recordkeeping requirements because funds and their advisers likely
use existing recordkeeping systems to maintain the required compliance records.

14.

Cost to the Federal Government

Rule 38a-1 does not impose a cost on the federal government. Rule 38a-1 does not
require funds to file any documents with the Commission. However, the Commission staff may
records produced pursuant to the rule in order to assist the Commission in carrying out its
examination and oversight program.
15.

Change in Burden

The estimated total annual burden hours decreased 1,780 hours, from 237,500 hours to
235,720 hours. This decrease in burden hours is attributable to changes in the number of
registrants.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable.
18.

Exceptions to Certification Statement for Paperwork Reduction Act
Submission

Not applicable.
B.

COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.

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